Subcontracting at LVMH brand categories (Part 2 of 2)

LVMH category sales 2011

The levels of subcontracting varies by products and is mainly dictated by factors such as governmental regulations, production processes, availability of raw material and the brand image/policy planned for a particular product. Since these can vary by company to company across geographies let us look at some of the categories of LVMH which can be considered as representative of absolute luxury.

Wines and Spirits:

Inclusive of champagne, cognac and other liquers this category is strictly bound by unique regulations like geographic indicators (Appellation d’Origine Contrôlée, for champagne) which limits the production area and the amount of subcontracting that can be done given the need to procure produce from this limited supply. LVMH like most luxury houses sub contracts only the bottle handling and storage operations. The blending of the stock based on harvests allocated to the company will be done inhouse

Fashion and Leather Goods:

The defining feature of the fashion and leather goods market is its seasonality and …. Everyone wants next season’s bag or dress. This decreases the lead time available for the retailer, increases cost of inventory and high product variation leads to lost sales if the right merchandise is not available at the store. Although this would indicate all out subcontracting as a policy, the importance of quality and brand guidelines for luxe products prevent 100% subcontracting. LVMH follows a judicious strategy with all design and distribution being kept in-house to ensure strict compliance to quality and brand image of the product.  Production on the other hand varies by brand with an average of 45% being sub contracted. The difference between mass merchandising and luxe retailers are that this sub-contracting is usually done in the country of origin (Italy, France and Spain in the case of LVMH) and not in China! The variation in level of sub-contracting would depend entirely on the brand strategy for that particular product (Refer post Outsourcing)

 

Perfumes and Cosmetics:

A proliferation of brands and very high volumes define the perfumes and cosmetics industry. These factors make economies of scale an attractive proposition for support functions such as distribution and logistics. LVMH has centralized its production of perfumes to two centers in France but leverages a shared service center for all brands at Saint-Jean de Braye (France) and currently subcontracts only 9% of manufacturing. The large number of SKUs is managed by using postponement techniques (but not incorporating mass customization – Refer: mass customization in the perfumes industry)

 Watches and Jewelry:

Production of watches is in the stronghold of Swiss workshops with little of over 10% sub-contracting.  Though some design is outsourced to other studios, LVMH retains much of the design process within its studios. This low figure may also be due to the acquisition of ArteCad and Profusion (Swiss manufacturers of watch components) recently. Since LVMH does not represent the big names in luxury watches or jewelry this category may not reflect industry attitudes to subcontracting. 

Thus though the level of subcontracting depends strongly on the brand strategy for the particular product, other factors such as seasonality, statutory regulations, lead times, volume of business all play an important part. Even where sub-contracting is used extensively (Fashion, Leather goods) a modified and much finer version is used vis-à-vis traditional sub-contracting. i.e more control, local sub-contractors and iron clad contracts are used.

Subcontracting at LVMH (Part 1 of 2)

Supply of raw material and production of goods for a luxury product is the key to maintaining quality and brand value of the product. The sources of supply and the level of subcontracting in SCMluxe will hence differ from the traditional retail supply chain. One difference which is obvious is the high level of subcontracting that can be envisaged in the supply chain of mass produced goods. The sources of supply are also far flung with little semblance to the country of origin. SCMluxe on the other hand would have local suppliers and lower levels of subcontracting (Refer Sourcing the Zara Way). However what surprised me was the wide difference in each of the product categories with respect to subcontracting. A study of LVMH showed the below figures

Product or Brand Category	Subcontracting as a % of Cost of Sales
Wines and Spirits	N.A
Fashion and Leather Goods	45%
Perfumes and Cosmetics	9%
Watches and Jewelry	10%

 What makes the level of subcontracting in the fashion and leather goods business so much higher than other product categories? Is it due to the larger volumes, nature of production or simply volatility of demand that makes it easier to subcontract than product from one’s own facilities? Any suggestions or answers from SCMluxe experts? Send across your thoughts and let’s incorporate it in a more detailed investigation of LVMH’s supply chain in the next few posts

Online Campaigns…..tailoring it to the audience

Though web and online portals are mainly used as channels for informing the customer and maintaining the brand of the luxury product (Refer E-Commerce for SCMluxe) , it is is an important tool of communication and the eventual buying decision. So an interesting study on the response of men and women to email campaigns by luxury goods caught my eye. The main differences between the sexes observed in the study were:



Luxury Chicks - funny or blase?

• Men click on links that are buttons or images more than on text. Whereas women tend to click on links which are “text”
• Women find “day in life” or messaging that conveyed a lifestyle. Men on the other hand preferred funny or witty messaging which was delivered in a quirky fashion
• And finally, men are more likely to open an email ad and respond to it than women would

Personalization of email campaigns especially with respect to subject, title, messaging and formatting is important to reach the target audience – hence we see Martha Stewart style images for home and fashion campaigns and Benetton features provocative messages. As to the links in the emails…do we do text or buttons …or is this all sexist nonsense in an increasingly egalitarian world?

Showrooming...what is it? and will it impact SCMluxe?

Brick and motor retailing involves not just an exchange of goods and services for a payment but providing the customer an experience of the product being sold. This is especially true in the luxury sector where the customer would like to experience the product, its values and the dream that is being propagated via the brand. Thus we see that luxury showrooms are opulent, carefully designed to provide the customer with this “experience”. This of course does not come cheap – it involves large overheads in designing, maintaining and running the showroom.

Traditional business has found online sales as a means to reduce these overheads. Once a brand is established, the e-commerce engine or web portal reduces the overheads of retailing to an almost negligible amount.  This leads to the ability to offer better prices/discounts online and hence we see the rapid growth in web sales on e-stores as compared to regular brick and motor stores. A recent phenomenon is one in which premium products where the customer would like to experience the product (fashion, watches, jewelry, high end electronics) in the showroom but avail of the better prices (due to lower overheads) offered on online e-stores. This leads to the concept of showrooming…where the customer visits the physical stores to experience and evaluate the product but buys it online. This increases footfalls in stores but with no conversion – the beneficiary being the e-store. 

Making sure window shopping is converted into actual sales?

Retailers have fought back by awarding loyalty points for in-house sales, deploying  innovative offers like mobile applications (see www.shopkick.com) which track and offer savings and points (kicks) which can be reclaimed for goodies in other stores  and in rare cases maintaining price disparity between online and offline sales channels to a minimum.

Luxury retailers have so far not been overtly affected since online sales channels are not actively used and price differences are kept artificially high (in e-stores). We also see that since experience and price is the deciding criteria for the luxury customer, we might not see customers resorting to showrooming. But in these recessionary times when even luxury is seen through the eyes of “value for money” will we see this phenomenon extending to the luxe sector as well? How will retailers react to it and what will be the impact on SCMluxe? Any thoughts or opinions?

Stock Outs and SCMluxe

Stock outs have always been used as a measure of the effectiveness and risk levels of a supply chain. This is mainly due to the retail sector wherein no stocks on the shelf mean a sale  (and revenue) lost forever to a competing product on the shelf. The manufacturing sector also uses stock out metrics to judge the risk levels of a particular inventory plan. For example, critical products like spare parts which B2B customers want on an immediate basis will have a zero stock out policy. This is since spare part non-availability or delay can mean the customer’s production line will have come to a halt. Hence these critical stocks always have very high safety stock levels vis a vis other less critical products. Generic products which can be substituted will follow a more aggressive stocking policy with lower safety stocks. What about the luxury industry? Do they segment products similarly?



IWC Exupery platinum watch. Note the serial number 01/01
limiting production to one piece to be auctioned for charity



As very nicely elaborated by Kapferer and Bastien in thier seminal  book "The Luxury Strategy" the luxury industry believes in limiting supplies to make the brand more desirable. Hence stock outs may not be viewed as entirely a lost sale (as in mass retail) but more as an addition to its brand value. Segmentation is the stock out strategy (or the tolerance towards it) is seen in the luxe industry as well. Limited edition products in absolute luxury categories are the norm. We see limited edition watches, chinaware (where the moulds are ceremoniously broken after production reaches a target volume) all the time to either commemorate a special event or simply to create a uber luxe and highly desirable product.  Similarly prestige brands are typically kept in short supply during introduction to keep interest from flagging and demand being satiated by flooding the market. Apple stores typically have long lines of eager customers camping outside stores on the eve of the launch of the new iPhone or iPad. Online sales are started much later in the sales cycle. Masstige brands on the other hand will start off with  both online and store sales with maximum volumes to ensure the market is fully exploited before competition is able to launch similar products and capture market share.

French aviator Antoine Exupery who gave us
"The Little Prince" and the inspiration for IWC



This segmentation of the stock out policy also has another important angle in SCMluxe – the ability to dispose off over stock. For uber luxe products (Refer post Disposing Overstocks) there is no channel for profitable disposal other than destruction of the product. Hence working on a tolerant zero stock policy by restricting supply also helps cut such losses from overstocking. Prestige and Masstige products on the other hand have channels for disposing excess stock in a more profitable manner and hence can afford to have less tolerant zero stock policies with more safety stocks built into the inventory plan

Roundtripping stock ... What is it? and why is it done?

Expensive inventory

Luxury goods inventories are expensive ...i.e not just the finished goods but also the raw material inventories. For most sub contractors or suppliers to luxury goods companies, this poses a peculiar problem - obtaining and managing credit lines. Though this is a problem faced by most upstream supply chain partners, in SCMluxe the problem is compounded by several factors such as:

•  higher working capital due to high cost of inventory
• seasonality in sales leading to stock pile up
• cash inflow not matching the outflow
• much longer cash cycle times

Hence SCMluxe suppliers are constrained in obtaining higher credit lines or getting them during the off-season when sales are low but production needs to be kept running to prepare for the high season.....roundtripping is one solution (albeit not entirely legal) that they adopt to manage the cash flow. This simply involves "selling" inventory to in-house units and then bringing it back after a certain period to avail higher credit lines from banks or financial institutions

An example will make this much clearer. Diamond polishers tend to have high stock of goods during lean times - especially with the current crises in the US and European markets. The hope is for the coming Christmas/holiday season or the "coming"  economic recovery to boost sales. To manage credit lines till then, these suppliers will parcel out large tranches of high value stock (large carat diamonds) to willing downstream partners (wholesalers/distributors) or in-house units. Higher credit lines are then obtained from the bank based on these higher reported sales. The stock is then bought back to the company either through returns or other such means (rework, to add further value by setting in jewellery etc). The downstream partner may or may not be compensated by a small token amount for his complicity. This process of "roundtripping" was specially predominant in Indian polishers till the government clued onto it and introduced a nominal import duty of 2% to curb such practises.

Swimming against the tide…Chinese luxe in Europe

While the stampede of western firms to sell to the seemingly insatiable Chinese market continues, a relatively unknown (atleast in Western markets)  Chinese luxury goods manufacturer is trying to forge a market in Europe.  An interesting fact is that Bosideng is not a manufacturer of typical “Chinese luxury” products such as silk or tea but is aiming at creating a global brand that is culture agnostic and appeals to the generic consumer of luxury products. With over 7579 retail stores and a market share of 36% in China, the company now seeks to move up the value chain by selling high quality clothing (with brands like Bengen, Snow flying and Kangbo) that would appeal to all well-heeled customers irrespective of their location (similar to the demographics of consumers like Christian Dior or Hugo Boss – a broadly homogenous well-travelled, mobile and high spending category of the privileged)

Red by Bosideng

Though there are some oriental touches to their fashion line, like the use of red piping on suits for instance, it is far too subtle to be plugged as “oriental”. It would be interesting to see how such a company would plan and execute its supply chain strategy while trying to move up the value chain – would it use abundantly available low cost labour and manufacturing in China? Would procurement be local or global or glocal? What would be the inventory stocking models? Let us look at some initiatives of Bosideng in SCMluxe while it is in the process of opening of its very first store in Europe in London’s trendy South Molten Street:

v  Procurement (or source) for the high end fashion line is from suppliers in Italy, Turkey and Portugal

v  Production (or make) is entirely out of Europe with only 7% being manufactured in China

v  Designers are commissioned from leading western brands such as Nick Holland and Ash Gangotra from the label Pretty Green

v  The main collection is restricted to 50 pieces at a time, so that new products are refreshed in the store on a weekly basis. This calls for a high inventory turnover and low levels of obsolete (out of fashion?) stock. Weekly refreshment of the collection will mean tighter controls over inventory and very short lead times. With manufacturing being local, logistics will be faster and simpler but demand forecasting will need to be very robust. Bosideng will have to err on the side of lower inventories risking stock outs. However in the luxury goods industry, stock outs may be a good for the brand?

South Molten Street, London

v  An all-out splurge on the retail store. With an estimated £6 million ($9 million) spent on its new property on South Molten Street, Bosideng is using a high cost sales channel instead of the cheaper option of using department stores (store in store).  This is because getting premium space for a newcomer is difficult in department stores  along with the problem of limited branding freedom

v  Alternative E-Commerce sales channel to be launched with a dedicated website for Europe. This move is to counter the twin challenges of a standalone retail store – (i) High Cost (ii) Low accessibility. The web sales model helps customers who cannot travel to the retail store locations as well as provide a cheaper option for sales

Obviously the above model of SCMluxe calls for deep pockets and staying power since the return on investments will take time. Will this high cost contra-indicative strategy of wading into a troubled market like Europe while the rest are heading East make profits? Or is it a well thought out strategy to establish a Chinese brand in the luxury market where these high costs may well be thought of as a part of the branding budget? Another interesting thought allied to this will be how the Chinese markets will be serviced with the above SCMluxe strategy? Currently Bosideng claims that for its high end suits, tweed is procured from European suppliers and shipped to China for tailoring before it comes back to Europe for the final finishing touches. Will this work for the Chinese market and will consumers want to purchase a local product at western prices? Bosideng may well provide us with an example of how the great leap East will play out…

Quick comparison of SCMluxe Retailing formats

While we have discussed retailing of distribution (Deliver) formats in posts (SCMluxe downstream part 2 and part 3), let us look at a quick comparison of the three formats in a tabular format for ready reference

Retail Sales Channel	Stand Alone Store (Boutique)	Store in Store (Department store)	Web Store (E-Commerce)
Cost	High	Medium	Low
Brand Value	High	Medium	Low
Accessibility for customer	Low	Medium	High
Flexibility in operations	High	Low	Medium
Control over operations (manage brand and communication independently	High	Low	High
Footfalls	Low	Medium	High
Footfall to order conversion rates	High (target footfall)	Medium (both targeted and accidental footfalls)	Low (mainly used to check out and compare product)

Though above is open to interpretation and in general self explanatory, if any readers want points above to be made more explicit, please write in and I'll be happy to have a more detailed post on this

Catering to the B2B luxury market

The focus of the luxury goods industry is normally on B2C sales with all distribution and communication strategies centered around the end consumer (retail stores, brand communication, pricing etc). However there is a large market in B2B as well. These comprise of two main types:

1. The product as a component of another product (eg. automotive audio/video players or glassware for perfumes)
2. Products sold to large businesses in bulk volumes (champagne to restaurant chains, cosmetics to airline or hotels)

Does SCMluxe vary from B2C to B2B. The answer is a resounding YES!

Some of the characteristics of SCMluxe for B2B that distinguishes it from the more common B2C value chain are: 

Champagne container for shipping



1. Packaging and Retailing - Packaging is aggregated in bulk - for eg. pallets, containers so that space is saved and transport is easier. The retailing end of the chain focuses less on presentation (this will happen when B2B finally gets converted into a B2C sale
2. Quality checks are conducted by buyers and sampling plans and inspection becomes routine
3. Vendor managed inventory and JIT or contract manufacturing is more in vogue and margins are generally smaller
4. Design is mostly dictated by the buyer and hence controlled minutely. R&D plays a smaller role except in initiatives to control cost 

   

   Champagne container at a Michelin restaurant

   
5. Procurement is demand driven and inventories can be better controlled since demand is known and predictable (forecasting and minimum offtake contracts with buyer can be negotiated)
6. Less focus on branding and retailing

However SCMluxe for B2B has the same pros and cons as the generic SCM - a trade off between assured markets/demand and higher volumes against lower margins vis a vis the more unpredictable but more profitable B2C supply chain. Strategies for B2B hence focus more on controlling costs and enabling the handling of large volumes (with minimum costs) so as to maintain razor thin margins. The ability to do so will provide competitive advantages for the leaders to stand out and succeed in an increasingly challenging business environment.

Kimberly, Marange and the diamond chain

The diamond chain starts off with mining diamond roughs in Africa/Russia/Australia, processing, cutting, polishing in India to finally being shipped to markets in USA and Europe.

Will the value chain partners support a block on Zimbabwe?

Zimbabwe poses a particular problem in this value chain as discussed in post "Marange and blood diamonds". Though Zimbabwe does not exactly fit the criteria for blood diamonds (it does not have a rebel army for instance) as defined by the Kimberly process to identify blood diamonds, western nations, especially the US have introduced sanctions against the sale of diamonds from Zimbabwe. Generally the response to the ban of sale of blood diamonds on humanitarian grounds has had good results with the sale of blood diamonds dropping from 5% of all sales in 2002 to less than 1% in 2012. However the sanctions on Zimbabwe will prove to be a strain on achieving further results. Let us see why:

Supply chain intermediaries such as cutters, polishers in India and China are not particularly happy and tend to push back on sanctions against Zimbabwe due to 3 main reasons:

1. Diamonds from Marange, Zimbabwe are 20% cheaper than those from Russia, Australia or by De Beers
2. Mines in Russia and Australia are nearing end of life whereas Zimbabwe is just taking off
3. Indian processors have already built a competitive edge in cutting and polishing Zimbabwe roughs which take approximately 3 months of effort compared to 1 month for other roughs. This acts as a high entry barrier to other processors and they would not want to loose this advantage to newer players in the market
4. Costs of processing is much cheaper in India and China. For e.g its costs $10 per carat in India and $15-$20 per carat in China (though of much lower quality) whereas it costs over $100 per carat in the US for processing a rough stone

Thus we see that the $23 billion Indian diamond processing industry with currently over 6% ($900million) of its sales originating from Zimbabwe roughs is not going favour these sanctions. But do they have a choice when the customers demand it? Already most processors publicly claim that only Russian, Australian or De Beers stones are offered to US customers. But are they compliant or are both suppliers and customers turning a blind eye to the issue? What is the cost/price that the customer is willing to pay/buy for humanitarian purposes on a different continent? there will a trade off between profits and compliance....how much? .....that is the million dollar question

Disposing Overstocks….are e-flash sales an answer?

Overstocking is an enigmatic problem in SCMluxe. With rapidly changing trends and fashions, luxe companies will always end up with over stocks irrespective of how carefully they plan their inventories. Though this problem is symptomatic of the retail industry as a whole, the luxury goods sector faces certain challenges in dealing with obsolete or overstocks since it cannot use the traditional channels of in-store sales/discounts or unloading the overstocks through discount chains or selling in non-core geographies/regions. Using any of these channels would adversely impact brand value and image. The disposal of overstock has to be discrete and tastefully handled. Typically luxury goods companies use a variety of methods to go about disposing overstocks:

·         Destroy Overstocks: True luxury companies would follow a strategy of simply using the landfill as a method of disposing overstock. It’s expensive but safeguards the brands positioning as the ultimate luxury

·         Recycle: Products where the components can be effectively dismembered and re-used would follow this strategy – a prime example being haute jewelry where precious stones can be re-set and metals melted and re-fashioned

·         Outlet Stores – these stores owned by the firm and normally situated in brand factory outlet malls outside suburban city limits carefully control the price and quality of overstocks being disposed off in an appropriate setting to the product and brand policies

·         Flash sales on speciality e-commerce sites – These internet based sites are not run of the mill discounting sites but are specialised to the luxury goods industry and sell products under strict guidelines which reflect their luxe ethos and excess inventory is sold only for a limited period of time with deep discounts. Some examples are Rue La La, Gilt Group, Ideeli in the US and Brand Retail and Vente-privee in Europe.

In this post, let’s look at some of the features of these speciality flash sales channels. Some of their distinguishing features from traditional discounting sites are:

·         Carefully controlled product list to incorporate and maintain itself as a purveyor of luxury products

·         Membership based sales with membership controlled to ensure the right audience (membership is regulated using online databases like Amex members for their platinum service etc)

·         Focus is not just on fast delivery and service quality but also on perfect packaging, creativity and marketing flair. Most of these channels will have in-house video, photo and recording studios to provide the most cutting edge online catalogues

·         Close association with the manufacturer and owner of the brand of the product being sold. In most cases an agreement is made out strictly covering all aspects of how the product will be marketed and sold on the online channel between the owner of the brand and the online site

·         Typically online sites such as Vente-privee will buy merchandise from manufacturers only after a customer has placed an order (and paid for it) on their site. This means a positive cash flow with absolutely no requirement for working capital

The obvious advantages of the online flash sale model have some draw backs:

·         Upstream issues of getting buy ins from manufacturers – brands typically require just two or three partners for liquidating overstock and competition from online partners is fierce. Also brands have their own outlet stores to liquidate stock making online sales only the last resort for un-sold stock

·         Low margins – since very little value is added by the online retailer, the margins are wafer thin in the US with Europe being slightly better at 6%-7% net profits. Also in the US competition forces online sites to buy merchandise in advance from manufacturers and stock them before a online sale is made – this means high working capital requirements, restricted cash flow and higher overheads in maintaining stocks

However the current economic climate is proving a boon for online flash sale business with the US market itself expected to grow from the current $1.75 billion to $ 7 billion in 2017. That’s a whole lot of luxury goods being sold online and at discounted prices….something manufacturers and luxe brands will need to watch out for.

Keeping sourcing local.....the Zara way

One of the biggest challenges in SCMluxe is to keep production or "make" local to retain quality and brand value (refer post country of origin). In the fashion industry lead time is crucial...hemlines can change by the time it takes for a shipment to arrive from China. Hence to avoid overstocking (besides brand considerations)companies try to keep sourcing local but this has a huge impact on costs. Inditex (Zara's holding company) sources almost all its stocks from the local region in Spain, Portugal and Morocco. This means Zara's costs (and prices) are higher compared with competitors like H&M, Gap etc which source from China. But it also means that Zara follows a pull rather than push model of stocking. Instead of depending on forecasts (notoriously unreliable in the fashion industry) to decide on stocks, Zara actually analyses the actual orders or material flying off the shelves and adjusts its inbound stocks accordingly. This means lead times have to be very short to manage stock outs at stores - which again is possible through local sourcing. Competitors on the other hand need to predict demand (fickle at the very least in fashion) and place orders with suppliers in China to make up for the long lead times. Prices are naturally lower than at Zara but customers needing the latest fashion seem to prefer paying these prices rather than buying something that they don't want at that point of time (or not in fashion at the moment). Does Zara also benefit from lower costs due to overstocking to compensate for higher costs of sourcing?


 However going local is not all rosy....it throws up a very important limitation. What do brands do when they need to cater to emerging markets far away from the country of origin? Zara sees a huge potential in Chinese customers willing to spend on its clothes which is deemed as a luxury purchase...but are they willing to wait for it to be shipped across from Europe? Thus lead times and local sourcing can become an impediment to growth. Inditex is now focusing on scaling up its designers in Shanghai (currently 12 as compared to 250 in Europe). Thus the creative process of the supply chain is being moved closer to the market....but will this impact the brand value for the Chinese customer?....will they see Zara as a luxury product or simply another local company with mid level prices? We'll have to wait and watch...

Insourcing “Make” – British brands show the way

SCMluxe has always insisted that production or the “make” strategy is always retained in the country of origin (Refer posts location, SCM Make ) to ensure brand recognition, quality, lead times and most of all the mindshare of the customer as a luxury product. Let us look at 3 British luxury brands which have demonstrated this in differing ways:

Mulberry factory - Shepton Mallet, Somerset

1.       The Flag bearer

The British fashion house Mulberry has always explored and built upon le style anglais starting from tweeds and country jackets to its more contemporary bags and leather goods (the iconic Chiltern bag being an example). This remains so even after the takeover by Singapore based Ong Beng Seng from founder Roger Saul in a $12Mn buyout – in fact the new owners have not only retained its national heritage but expanded its appeal by bringing in contemporary British design.  They quickly realized that the leather goods and bags market was independent of culture and body type. For instance no matter if you were a size 0 or 10 or were from a culture that dressed conservatively, if you had the money, you could always show it off with an expensive handbag. So Mulberry invested heavily in the design and launch of its bags collection but also poured money ($8 million and counting) into its production facilities in Shepton Mallet, Somerset.  The factory now produces almost 30% of all Mulberry bags and employs more than 300 in the area. Each of the 300 will be specialized artisans skilled in cutting and processing leather. With over 140,000 bags being supplied to the world market from British shores, the brand retains its value and quality in the customers mind

2.       The Status Quo



Jaguar assembly plant - Castle Bromwich, Solihull



When India based Tata Motors took over an ailing Jaguar from Ford in 2008, the easiest way to cut costs and bring the company back to black would be to shift or outsource production to Tata’s expansive factories in India. However assembly of a Jaguar continues to remain in Castle Bromwich, England. Instead the company focused on bringing in new processes, improving efficiencies in sourcing and assembly as well as broadening the Landrover’s appeal in the market. Retaining the Landrover’s British heritage paid off this year with the division registering a profit of $1.7 billion after years of being in the red or barely breaking even

Burberry HQ - Horseferry Square, London

3.       The Prodigal returns

The success of Burberry’s iconic check pattern spurred the company into luxe status and as a symbol of British design and quality. However the pressures of being a public limited company and quarterly forecasts the company started selling licenses to manufacturers across Asia to produce and sell the plaid pattern on perfumes to purses to underwear. A resulting drop in quality, excessive volumes flooding the market and lack of control of display and distribution meant the brand lost its luxe appeal in the mind of the customers. It was now a mass market brand (very much like Pierre Cardin today) with large volumes, low prices and low margins. A price war meant customers were not willing to pay a premium for the product but expected it to compete with price and quality with other generic products. Shareholders finally saw sense in 2006 when the company started buying back the licenses under the stewardship of CEO, Angela Ahrendts. The cost of these buybacks were high but the company has managed to stay afloat by retaining its British tag – it now needs to build and restore customer confidence in its luxe status….all over again

Emphasizing national heritage helps established Western brands to retain existing markets and grow in the emerging markets of Asia and the Middle East. However what will their response be when Asian customers mature and demand their own heritage brands – will this be a competition to existing Western brands or will they simply open up an altogether new market?

Website Management for luxe companies: e-commerce or e-inform?

The internet is an increasingly important sales channel for most mass mechandizing products and one that traditional SCM has incorprated as a unique distribution channel with very low set up costs. SCMluxe however treats the internet as more of an channel to inform a customer of the product rather than to actually sell. This is mainly due to the nature of distribution in luxe products that requires a high customer touchpoint and experience before the purchase is made. Thus SCMluxe will normally utilize the internet to inform and build brand awarenedd for potential customers. Hence one needs to keep in mind several very imporatnt facets when designing and maintaining an internet presence for a luxury good:

• Utilize own websites to promote and inform about the product or associate with an internet site that suitably identifies with the brand. "Never" utilize mass e-retailing sites like e-bay, amazon etc (as seen from the recent slew of court cases between Tiffany and e-bay...)
• Ensure the website informs rather than "sells". This also means go slow on the animations/ special effects etc which might not really show up on devices like iPads or iPhones. Alternately have dual versions for mobile devices. Remember customers will prefer to intensively research and compare a high value product before heading down to a store for the actual purchase
• Meta tag appropriately so that the web site shows up for the correct search criteria and is ranked fairly high up. Use SEO or Search Engine Optimization techniques. Remember that using excessive flash diminishes chances of search engines recognizing and ranking web sites higher up in priority/relevance
• Use membership based access to special views on the website

Any other pointers readers can suggest for websites?

Half minute to download and heavy on flash